Thursday, February 15, 2007

Off Topic - Kind of . . .

This site is devoted primarily to issues involving health insurance but occasionally we will stray into other areas of risk & financial management.

This is one of those times.

While the story is about a multi-line carrier and their P&C block, the ramifications show what can happen when the courts are involved in interpreting contracts after the fact. This kind of situation can affect other lines of coverage, including health insurance, should the circumstance arise.

NEW YORK (Reuters) - State Farm Mutual Automobile Insurance Co. said it will stop writing new policies for homeowners and businesses in Mississippi following a legal battle over damage claims there from 2005's Hurricane Katrina.

"It is no longer prudent for us to take on additional risk in a legal and business environment that is becoming more unpredictable," Bob Trippel, senior vice president of the largest home insurer in the United States, said in a statement on Wednesday.

State Farm joins other insurers -- including Allstate Corp., its biggest national competitor -- which are cutting back in coastal areas. Among them are American International Group Inc., the world's largest insurer, and Nationwide Mutual, the parent company of Nationwide Financial Services Inc..

This next line is quite telling.

"Hurricanes can be insured against, but litigation can't," said Robert Hartwig, head of the Insurance Information Institute, which provides insurance statistics. "Those costs are extremely high."

While some will disagree, carriers are in the risk MANAGEMENT business, not risk avoidance. Managing a particular risk involves weighing known variables based on past experience and projecting those variables in to the future. Dollars of the many are exchanged and managed to provide dollars for the few that can be scientifically expected to incur a loss.

Insurance contracts are aleatory in nature. In a commutative contract parties give up goods or services of equal value. An example is swapping cash for a home or auto.

Aleatory contracts involve amounts that are unequal in nature. In this case, a homeowner may pay $500 per year in exchange for a contract that could potentially pay out several hundred thousand dollars.

The amount at risk for the homeowner is small . . . only a few hundred.

The amount at risk for the carrier is substantial. When the risk allowance is compounded by legal fees the cost of doing business is too great for the carrier to absorb.

Contract language is quite specific as to what is covered, what is not. In this case it appears that emotion over the magnitude of the loss may have impacted the legal decision.

This is not the first time emotion has resulted in substantial payouts not predicated in contract or law. The loss of life in the WTC disaster prompted numerous suits against parties not directly responsible for the loss. Many of those suits are still unsettled to this day.

Litigation carries a cost that must be factored in to the cost of doing business. When litigation becomes excessive and unreasonable, a carrier's only choice is to pull the plug and walk away.

It is possible that State Farm could have stayed in the game, provided their rate structure would be approved by the DOI in Mississippi. As a regulated industry, State Farm is quite literally caught in the middle. They are being forced to pay claims that are not viewed as contractual obligations and any attempt to recoup with higher premiums could be stymied by the DOI.

Recently it was reported that many people who live & work close to ground zero in New York continue to have health & respiratory problems. One wonders what kind of impact this may have on health insurance availability and premiums for those in New York.
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